Sunday, November 30, 2008

So when will the market bottom out?

The bottom will be somewhere in the next 12-24 mths. ie Dec 09 to Dec 10.

What? 24 mths? So my portfolio has to suffer another dunno how many % downside? What kind of prediction is that!??

Well, let's start with the disclaimer first, nobody ever predicted nothing. Bell said nobody needs phones, Ford said nobody needs cars, and the most famous one: Bill Gates said nobody needs computers. So that is just my contribution. It won't be right. Maybe we have already seen the bottom. Who knows? Maybe we didnt avoid the Great Depression scenario. We just don't know yet. Ok, let's get to the facts.

Few trillion dollars have been forked out. Wall Street will be rescued. Global coordinated efforts to help stabilize the whole banking and credit system have done the trick. The life-and-death crisis has been resolved for now. We are out of the ICU, for now. But the stock market keeps tanking!

Well, the patient is still very sick. Still on drip and breathing weakly. It takes time to heal. There are still bad stuff in the financial system that needs to be cleared. More disposals and write-off before we are good to go. May go back to ICU again also. But chances not high. Hopefully! We don't want Great Depression II. Check this post.

As for the "real" economy, it has started to slow and will continue to slow. Esp US. It is said that we need another few trillion dollar fiscal packages for Main Street. The common folks stuck with paying mortgages that cost more than their homes need money. And those pple using credit card loan lines to buy food and pay bills. So wait for some help to come in the next few weeks.

Then we need to wait for China to come back. The credit bubble that fuelled part of China's spectacular growth has burst, so China feels some impact, but it's economy is robust enough to withstand the negative impact. Given a few quarters, it will come roaring back. And hopefully, it will lift the rest of the world up.

In terms of magnitude, we are probably not far from the bottom. Or may already be at the bottom. But in terms of time, things need time to recover. Positive catalysts on the REAL economy must appear before the market can move up. They won't appear so soon but quite a good likelihood it will come in the next 12 to 24 months.

So time to open the purse strings, it's the great Singapore sale on SGX coming up!

Tuesday, November 25, 2008

Game Theory - Part 2

This is a continuation of the last post on game theory

Just for argument sake, let's look at the taxi industry in Singapore. There are 6 taxi companies, ie 6 prisoners. The Big Brother is of course Comfort, with 60% market share, having 14,000 taxis out of the total population of 23,000 taxis. Then there is No.2 SMRT with 3,000 taxis or so.

Currently everyone is just following Big Brother moves and nobody is saboing one another. Which is very good for the industry, as profits can improve for everyone. However, passengers suffer lor. We have to accept price hikes no matter what.

Actually, if you think about it, 1 taxi co. can play punk and not follow suit. E.g. SMART taxi sabo the rest by reducing flagdown rate $2, which is significantly lower than its rivals' $3. By doing this it can actually gain market share. Well that's theory lah, in reality, it will not work bcos

1) Passengers currently cannot choose taxis in a taxi queue, so some kind of mentality change needs to take place, maybe like local celebrities leading the movement of choosing taxis in a queue or something

2) Taxi drivers of SMART may not be smart enough (no pun intended :) to realize this can actually boost their revenue and hence protest fervently to the lower flagdown rate

3) The taxi capacity (or supply) in Singapore is actually very tight, demand for taxis at peak hours dramatically exceeds the taxi population capacity, hence there is no need to resort to cutting prices to gain market share to boost revenue at this stage.

Well all this would change as our society matures. Some day in the distant future, taxi usage may decline and taxi population may actually exceed demand and there will be such a need to resort to price wars.

But even so, as one can imagine, after SMART reduces flagdown to $2, Comfort can simply reduce to $1.90 and crush all competition. So nobody will dare to do such things today. So in this set of prisoners, the outcome is usually quite favourable bcos there is a dominant leader that can dictate others' decisions.

However, back to our distant future scenario, taxi usage is in decline and most taxi co.s are struggling, in desperation, SMART, Prime, SMRT and Silvercab merge to form one company which will now have 50% market share. This new entity then reduces flagdown rate to fight Comfort. We may see the worst case scenario in the prisoner dilemma, ie both parties suffer as they reduce prices but yet cannot gain market share. However this will actually be very good for consumers.

Well, that's a sort of real-life game theory analysis of industries. Hope it can give some insights when you think about the companies that you want to invest in.

Wednesday, November 12, 2008

Game Theory - Part 1

Game theory is something that was very popular about 10 years ago I think. It tries to mathematically deduce what is the best course of action given a set of circumstances. The most simplistic example would be the famous Prisoner Dilemma.

For the uninitiated, I will give a Singapore version. Say two opposition party members ganna sued by our beloved Gahmen and are put into difficult situations. The Gahmen needs either one of them to confess in order to sue them till their pants drop, so has resorted to interrogate each of them separately whether they want to confess to their crimes.

Gahmen: Hey loser, if you confess your crime and sabo your friend, we will lighten the sentence for you.

Opposition: I will never befray my comrade, screw you!

Gahmen: You sure? Your friend in the next room is going sabo you, you know?

Opposition: You are lying! He will never betray me, we play Goli together one!

Gahmen: Look we are the most transparent, most efficient, most clean Gahmen in the world basically here are your choices:

1) If you don't confess, and he sabos you, you get sued $1mn, he just pays $1000 for wasting our time and walk away
2) You confess and sabo him, you pay $1000 and walk away
3) If you both sabo each other, you get sued $1mn each
4) If you both don't confess, basically we lock you two up for 3 days, you both pay nothing and then you can walk, bcos we have no other way to get evidence

Transparent enough right? So it depends whether you trust your friend or not, if you really think he will not sabo you, then you should not confess.

Opposition: He will never betray me, we play Goli together one!

Ok, so that's Prisoner Dilemma. How does it apply to investing?

Essentially, a firm in a competitive industry is always in the prisoner's situation.
1) If the firm cut prices and competition doesn't, then it gains market share
2) If competition cut prices and the firm doesn't then it loses market share
3) If both cut prices, then both are in a worse situation than before
4) If both maintain prices, or even better, both raise prices then both parties will improve their situations

Well, value investors look for firms that won't get into this kind of situation. Firms in businesses where there is no competition or somehow the firm has a huge economic moat that shields it from price wars or other threats.

In the next post, we shall discuss a real life competitive industry involving Prisoner's Dilemma

Wednesday, November 05, 2008

How to be a millionaire?

Based on the recent poll, most people actually got the right answer. I guess it's the way the question is structured and the answers are listed out. So congrats to those who chose the last answer (1.134mn answer).

Btw, the question is "If you save $1600 a month and your money earns you 10% return per yr on average, what is your total savings at the end of 20 yrs?"

So that's the answer, just save $1600 a month, let it grow at 10%pa, in 20 yrs you become a millionaire. I guess most readers would say, hey that's not exactly an easy think to do. Some households don't even EARN $1600 a month. And most households in Singapore can barely save a few hundred dollars. And 10%pa is very high target, what's more you need to make 10%pa for 20yrs!

Well, you are right! It is not easy, it's not meant to be easy. If it's that easy why don't we see millionaires everywhere? (Well actually they ARE everywhere, about 70,000 of them in Singapore.)

Nevertheless, I think there are a few takeaways here.

1) If you are really determined about becoming a millionaire, this is one sure way to reach your goal instead of relying on some lucky event to happen in your life. E.g. waiting for your HDB or condo en-bloc, or punting the stock market, or winning 4D etc.

2) Time is an element that you can control. Say if you are not sure you can hit the 10%pa, but we are sure about 5%pa right (bcos CPF pays 5%) then work with 5%. The same amt, $1600 compounded at 5% will reach $1mn in 27 years. So the trick is to start early. If poss. better start to start at age zero. Start for your children! Hehe.

Btw I have to spreadsheet that will calculate this for you. Send me an email at xtam.sg@gmail.com if anyone needs one.